How are councils using companies?

In 2017, in a co-ordinated strategy, the London Borough of Tower Hamlets created two companies simultaneously. The first, a wholly owned company, adopted a target of buying up to 100 properties from the market to be let at market and intermediate rents before developing new homes.

However, government rules prevent the use of Right to Buy receipts in a housing company in which a council has a controlling interest. To get around this restriction, Tower Hamlets created a separate community benefit society to provide homes for sub-market rent. Although the council would only appoint two out of five trustees, a deed of covenant – which it wrote – requires that the rules of the society cannot be changed without the council’s consent.

Legal uncertainty can also stop some councils providing higher levels of social rented homes through their housing companies, says Scott Dorling, partner at law firm Trowers & Hamlins.

“If companies provide a high proportion of social housing, they might be liable to legal challenges from tenants facing eviction. There has already been one case where a housing tenant claimed they should have been issued with a secure tenancy as they would have been through the HRA.”

Austerity is another limiting factor on the amount of social rented homes provided through housing companies. During a period of rapidly shrinking grant funding, councils have used powers under the Localism Act 2011 to set up companies across a number of areas to generate commercial income to help fund services.

“In most if not all cases, a major driver for setting up housing companies has been to earn income for councils’ general funds,” according to Steve Partridge, a director at Savills Housing Consultancy.

Pictured: Ravensdale & Rushden (Brick by Brick)

Created in 2016, Brick by Brick has planning permission for 1,253 homes on 39 sites, with around 48 per cent being provided at affordable rents.

The company is funded by borrowing from the council, which sources the funding from reserves, the Public Works Loan Board and grants. It has also received grant from the Greater London Authority to build shared ownership units.

The company also builds homes for an independent charity, Croydon Affordable Housing, set up by the council to benefit from Right to Buy receipts and provide homes at no more than 65 per cent of market rent.

Colm Lacey, chief executive of Brick by Brick, says that council-led housing companies “can play a key role in the supply, acting as either developer or, in effect, contractor” for new homes built through the HRA.

Commercial spirit

Most housing companies receive all, or a large proportion, of their development cash from their parent councils. Local authorities can borrow at cheap rates from the government’s Public Works Loan Board and on-lend it to the companies. State aid law requires the councils to charge a commercial rate, creating further profits that the council can put towards services.

In addition, the strategy of using housing companies to return profits in the form of dividends to parent councils holding 100 per cent of the shares means that some companies are more focused on higher-yielding housing tenures, with a handful, such as City of Wolverhampton Council’s WV Living, producing a large proportion of homes for market sale.

This is likely to act as a brake on the long-term growth of individual housing companies, according to some in the sector. Graham Ebers, deputy chief executive and chief finance officer at Wokingham Borough Council, one of the first authorities to create a housing company, says: “The idea is that once you have repaid the debt, in the longer term you have a very viable entity that could go to market independently and act in a much more commercially spirited way.

“However, there is always a tension – how much goes back into the company to reinvest in this bigger, brighter future and how much do we take out to fund services now we are under financial pressures?”

“If you have a development company building 100 homes and planning rules mean that 30 of these have to be provided as affordable, it will be easier to do this with a council-owned company than selling them to a housing association”

The revenue-raising motive for many housing companies, and the related focus on markets that are not in direct competition with the HRA’s social housing product, means that most councils are unlikely to abandon their housing companies, according to Mr Partridge. “Because they are not doing pure social rented, the lifting of the HRA debt cap is unlikely to have much impact,” he says.

A resurgence in HRA development could actually boost the use of councils’ housing companies, Mr Partridge predicts, in being complementary to their work.

“If you have a development company building 100 homes and planning rules mean that 30 of these have to be provided as affordable, it will be easier to do this with a council-owned company than selling them to a housing association,” he says.

Mr Bibby agrees, saying: “Where councils are looking at larger projects on land they own – such as estate renewal – councils can look at developments strategically. Having the ability to provide private and increased amounts of social housing themselves is more straightforward than entering into complicated joint ventures which do work but which can slow up development.”

Janice Morphet, visiting professor at University College London’s Bartlett School of Planning, who is co-authoring a report for the RTPI on methods of direct provision of local authority housing, says that there might be a pause in housing company work as authorities focus on expanding their HRAs.

But she says this will likely only be temporary, and also points out: “Half of councils don’t have an HRA anyway, so their housing companies are not going to be affected.”

Pictured: Suffolk Close (Bristol City Council)

Goram Homes launched last year, and was a key pledge by Marvin Rees, mayor of Bristol, during his 2016 election campaign. It already has planning permission for 268 homes on two sites in the city.

The company aims to provide 30 per cent affordable housing – 23 per cent at social rent levels and seven per cent for shared ownership.

It enters into a new joint venture with a private sector developer for each site it develops – the company puts in land and equity, while the developer provides development funding. The council has already set aside £100m that it could borrow from the Public Works Loan Board and on-lend to the company to fund future development.

Paul Smith, cabinet member for housing, says that the authority is in the process of setting up another company focused on acquiring affordable homes rather than developing them. “The lifting of the cap hasn’t changed our strategy. We will continue to use the HRA to build out smaller sites of between 20 and 80 homes, with the housing company focusing on larger sites of more than 100 units.”

Right to Buy worries

Although many councils have enthusiastically embraced the lifting of the cap, others may be more circumspect, according to Mr Bibby.

“We are picking up that some councils are wary of the implications of the Right to Buy policy. It is still one of the biggest disincentives about new build. The HRA is supposed to be run as a business – not many private firms would build homes and sell their product at 60 per cent of its value.”

However, Mr Dorling says that authorities can reduce the potential impact of the Right to Buy on their HRA development programme by managing their lettings sensibly.

He says: “The Right to Buy discounts build up over time. If the council allocates a new home to an existing long-term secure tenant they might have built up the maximum discount. But if they let to a new tenant, that tenant won’t qualify for a discount for three years, and will take some time to reach the maximum discount.”

Some authorities will be restricted in the amount they can expand their HRA housing programmes because they are still governed by prudential borrowing rules, says Mr Bibby. In addition, many authorities might take a cautious approach on new build through the HRA because 2018’s Social Housing Green Paper suggested a reform of the Decent Homes Standard. “This means they might need to focus their HRA cash on refurbishment,” Mr Bibby says.

“With some exceptions, councils that have set up housing companies of one sort or another by and large haven’t achieved a great deal”

A more prosaic reason that the lifting of the HRA cap might not have a major impact on councils’ use of housing companies is that the model has so far only produced a modest amount of housing.

“With some exceptions, councils that have set up housing companies of one sort or another by and large haven’t achieved a great deal,” says Jonathan Clarke, managing director at corporate finance firm Centrus.

Although many housing companies have been registered, many of them have sat inactive, according to Ms Rafalowicz. “Even before the lifting of the cap, councils were already wondering how they were going to use the companies they had set up.”

One finance director at a council in such a position complains that politicians can often use the idea of a housing company as an electioneering gimmick before abandoning the idea.

Whatever the future holds for the fledgling wholly owned housing company model, he believes that the lifting of the cap is likely to have a far bigger impact on council housing delivery.

“I am really agnostic about housing companies, which come with all the overheads of setting up a company,” he says. “The lifting of the HRA cap is great news. It is a business model that is tried and tested, and it works well.”